Beware of Foreign Capital Flows Back

Indonesia needs to alert the reverse flow of foreign capital (capital inflow reversed) after the expiration of loose money policy (easing quantitave-QE) who applied the Central Bank of the United States.  “Indonesia’s central bank needs to set up reserves in anticipation of market turmoil to dampen the money if there is a sudden withdrawal of foreign portfolio,” said Merrill Lynch economist Chua Bin Rights in conversation with Reuters on Tuesday (06/28/2011).

The Fed, Federal Reserve, began applying QE years ago with the goal of accelerating the economic recovery of the country, Uncle Sam, who collapsed due to financial crisis of 2008. In principle QE done as if there’s additional money the central bank. Virtual money is then moved into banking and capital markets through the purchase of assets in stocks, corporate bonds, as well as government bonds.

Step central banks do QE is not too problematic as market participants and users of government money are still believing it. The problem is when it is increasingly being done – then the value of the currency of that country will continue to be eroded quickly and harm anyone who holds it.

Right Bin said emerging market countries in Southeast Asia such as Indonesia and Thailand enjoy a swift influx of foreign capital outstanding in the last two years. “The rate of capital inflow reached four times higher than before the crisis, is worrisome. Foreign ownership of securities owned by the state government of Indonesia has reached 30.6 percent,” said Bin Rights.

Indonesia reserves reaching 100 billion U.S. dollars judged strong enough to cope with shocks. Reserve was necessary to shore up the rupiah from falling too deeply in case of capital outflow in large numbers.